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Hong Kong has a rich tradition as a trading hub with its port being ranked as the world’s fourth busiest by container volume according to the most recent data1.

It has not, however, been known as a centre for innovation, although this sentiment might be changing. “In the 21st century, Hong Kong needs to create value with technology, intellectual property, and content to remain globally competitive,” observes Rachel Chan, founder and Chief Catalyst of InnoFoco, a self-described network economy consultancy, which works with government agencies and fast-growing start-ups.

The data supports her analysis: in a recent global survey Hong Kong rated as one of the top five fastest growing entrepreneurial ecosystems in the world.2 In the World Bank’s Doing Business report, Hong Kong ranks fourth globally in starting a business and fifth overall in terms of ease of doing business.3

Another reason, according to our survey, is that Hong Kong is a hub for financing, which is the biggest challenge in starting a business globally (cited by 46%) but less of an issue here (38%) in part due to its large stock market and financial services industry. Hong Kong also has the added benefits of its proximity to mainland China and is positioning itself as “Asia’s world city”. “You have all the benefits of China and of the West,” says Simon Squibb, the founder & chairman of Nest, a global venture capital company. “Good rule of law, it is easy and cheap to set up a company, and you have access to financing.”

A missing piece

Lack of government support is cited in the EIU survey as the second greatest challenge globally (39%) for entrepreneurs and this is especially prominent in Hong Kong (58%), which rates highest in this category among all cities. Add to this that respondents also say that government support for entrepreneurial communities is particularly insufficient in Hong Kong (84%) compared to the global average (72%). To bolster the innovation ecosystem, the government has launched a few programmes including support for early-stage funding and innovation hubs, such as Cyberport and the Hong Kong Science & Technology Parks Corporation; however, there is a sentiment that what is being done is not enough.

The government can do more to encourage young companies,” observes Ms Chan.
She cites as an example procurement where most of the contracts are now awarded to the bigger players. As a result it is not unusual that smaller start-ups have to rely on orders from outside of Hong Kong until they grow large enough to compete locally. Ms Chan attributes this to the fact that the Hong Kong government, compared to some others, is too cautious in trying innovative solutions from startups with no track record. The EIU survey supports this statement: only 7% of Hong Kong entrepreneurs say their government is “very effective” in supporting entrepreneurship compared to an average of 15% globally.

The gap is partially filled by its strong financial services sector andactive investors. One of them is Mr Squibb who founded Nest in 2010. After having travelled the world for a year to tour all known—and some lesser known—hubs for innovation he spotted a gap in the market: there were very few global venture capital companies. Although Nest has an “Asia first” strategy the company has pursued this plan and now have eight offices around the world, although its headquarters are in Hong Kong. “What I realised is that every ecosystem has its strengths and weaknesses,” says Mr Squibb. “Because there is no perfect place, what we do is to leverage relative strengths by thinking global and acting local.”

Co-working and networking

Locally, the informal community also plays a part in addressing the city’s deficiencies. One particular challenge in Hong Kong is rent. In the Worldwide Cost of Living 2016 report from The Economist Intelligence Unit, Hong Kong is tied for second as the most expensive city in the world to live, which not only affect would-be entrepreneurs but also the potential for recruiting staff. High prices also apply to office space. “This is where co-working spaces really help start-ups and that’s one reason they have exploded in recent years,” says Mr Squibb. The number of co-working spaces in the city is anecdotally more than 50 as entrepreneurs take advantage of shared office costs.

Hong Kong’s high office prices affect would-be entrepreneurs, but “this is where co-working spaces really help start-ups and that’s one reason they have exploded in recent years.”

– Simon Squibb, the CEO of Nest (Singapore)

Another booming informal community in the city is global online networking which is far more common in Hong Kong (67%) than the global average (58%), in part likely due to the level of English capability here and the potential benefits it brings to those who can take advantage of them. “These days online networking is very important,” says Ms Chan. “I see entrepreneurs using Kickstarter to raise funds and LinkedIn as an easy way to try and get an introduction.”

As a result, far more respondents in Hong Kong (74%) say the entrepreneurial communities in their city are mainly unstructured: i.e. groups or activities without formal objectives than the global average (54%). Ms Chan, for instance, says she received no formal support when she started InnoFoco in 2008. Instead she relied on business contacts and friends for advice.

Looking ahead

Given the current environment, it is surprising that only 13% of survey takers in Hong Kong say the informal environment will be “very important” three years now, a much lower figure than the global average (24%) and second only to Seoul (9%) in this regard.

One reason could be that these informal networks are developing into formal ones. Mr Squibb, for example, is trying to achieve the best of both worlds as his company has just launched a platform that combines informal online and formal offline networking in which entrepreneurs can help other entrepreneurs. His own best piece of advice is to ask “why” someone wants to start a business. “You have to ask why you do it and not many people can answer that,” he says. “If you don’t have a “why” then you just do it for the money instead of having a passion for it.”